Every time you get into a car or truck, chances are you will come into contact with an Aptiv product (APTV)†
It is Aptiv software that sends the alert when you are too close to another vehicle and the lane departure radar that prevents you from drifting in front of or into another driver. And it is Aptiv that provides the electrical distribution system and high voltage connectors that help you power your electric vehicle.
And yet, at a recent price of $110, Aptiv’s stock is trading at a 24% discount to Morningstar’s fair value estimate of $141 per share.
“When it comes to stocks, it’s one of the best stories on the street,” said Richard Hilgert, Morningstar’s senior equity analyst. “Now is a good time for investors to look at Aptiv. It rarely trades below our fair value estimate and has historically always traded in the two-star range.”
Hilgert estimates Aptiv’s average annual revenue growth at 12% per annum between 2019 and 2026. Its earnings before interest, taxes, depreciation and amortization, or EBITDA, margin of 16.5 is one of the best in the industry. Aptiv’s return on invested capital, or ROIC, is between the high teens and low 20s, and is also among the highest in the group.
“It has the highest growth rate of all suppliers,” says Hilgert.
Partnering with more than 20 global automakers, Aptiv can capitalize on the megatrends driving industry change as auto and truck makers race to roll out the next generation of fleets that are greener, smarter and safer. The good news for investors: While consumers are asking for these changes, many of them are the result of government mandates.
Morningstar Sustainalytics assigns a low risk rating to Aptiv based on environmental, social and governance or ESG factors and considers it a low level of controversy. The company has a strong appeal to funds that follow ESG and impact strategies. Some of those with the largest weightings of Aptiv stocks in their portfolio are the UBS Engage for Impact (UEIPX) at 3.1%, BlackRock US Impact (BIBFX) at 3.4%, Cushing Global Clean Equity (CGCNX) at 2.9%, and Pax Global Opportunities (PXGOX) at 2.6%.
Undervalued amid improving fundamentals
Hilgert awards Aptiv a “small moat” rating, pointing to a product pipeline full of intellectual property and its ability to bring new technologies to market. He also cites that the company’s “sticky market share” is supported by deep customer relationships and long-term contracts.
“We expect Aptiv’s average annual sales growth to be 8 to 10 percentage points higher than the average annual growth in global demand for light vehicles,” notes Hilgert. †Aptiv’s ability to regularly innovate and commercialize new technologies enhances revenue growth, margin and return on investment.†
In mid-April, Aptiv was identified as one of 119 US-listed companies considered undervalued in Morningstar’s coverage area of 866 companies, which saw fair values rise at least 10% on improving fundamentals despite a challenging business environment.
The stock is off its 52-week high of $180.81 and is down 37% since the start of the year. Automakers and the parts and equipment sectors are among the worst performing industry groups this year as supply chain problems, semiconductor shortages and higher raw material costs weighed on the entire industry.
Despite the challenges, Aptiv showed its resilience in the first quarter when it reported special items adjusted earnings per share of 63 cents, beating Wall Street’s estimate of 61 cents, according to FactSet. Still, earnings came in below the prior year’s $1.17 per share due to unpredictable customer production shutdowns, delivery issues and higher costs.
Aptiv’s first quarter revenue also exceeded expectations, coming in at $4.18 billion, up 4% from a year earlier. Sales growth was 11 percentage points ahead of the 7% decline in global light vehicle production, weighted by customer base. Pressured by lower production levels and inflationary pressures, the operating margin of 7.8% was below the 11.8% reported a year ago.
An even brighter sign: Aptiv management stuck to its full-year 2022 sales outlook of $17.75 billion to $18.15 billion, earnings per share of $3.90 to $4.80 and operating margin from 9.9% to 11.2%.
“They are benefiting from some of the strongest secular headwinds,” said Quoc Tran, chairman and chief investment officer of San Rafael, California-based Tran Capital Management, which has $1.2 billion under management. He points to the rapid transition around the world to the production of battery-powered electric vehicles.
Tran says Aptiv has content in one in 3.5 low-voltage vehicles and in one in two battery-powered electric vehicles launched between 2020 and 2022. He notes that the dollar value of contents in battery-powered electric vehicles is 2.5 times that of vehicles with traditional combustion engines.
Wind River’s planned $4.3 billion cash acquisition of private equity firm TPG (TPG)which is slated to close in mid-2022, should also strengthen its competitive position, especially with autonomous driving vehicles.
Is Aptiv a good stock to buy?
Motional, the 50-50 autonomous driving joint venture with Hyundai, is also adding to the potential value of Aptiv’s shares (HYU)† Motional was founded in March 2020 for $4 billion and is now described by Tran as a hidden asset. Cruise, a self-driving car company backed by General Motors (GM) among others, received a valuation of $30 billion after the latest funding round.
If Motional were at a comparable price, it would bring Aptiv’s value to $15 billion, more than half of the company’s current market value.